Game Over For Mobile Developer IPOs?

It
wasn’t hard to see this one coming. Shares of King Digital plunged in after-hours trading Tuesday when the mobile game company reported weaker-than-expected revenue because of lower sales from
its monster hit title -- “Candy Crush Saga.” You mean even red-hot mobile games eventually cool off and stop throwing off cash at the same eye-popping rate? Shocking.

King
disclosed that gross bookings -- the amount users spend on virtual items in games -- dropped 5% to $30 million in the second quarter from the first quarter. That was mainly a result of the reduced
revenue from Candy Crush, offset partially by sales from more recent games like “Farm Heroes Saga” and “Bubble Witch 2 Saga.”

Overall, the company posted revenue of
$594 million in the quarter, missing analyst expectations of $608 million. Concerns about King Digital being a one-hit wonder were evident in the chilly reception to its initial public offering back in March, when it
shares closed 16% below its $22.50 opening price. Shares on Tuesday fell 21% in after-hours trading following its earnings release.

King’s disappointing results came on the heels of a
weak earnings report from Zynga, with the social games developer still struggling to adapt to the shift to mobile devices. It was none other than "Candy Crush" that dethroned Zynga’s once mighty
"FarmVille" as the top app on Facebook. Now it’s subject to the same vagaries of shifting user tastes and interests. Wait, there goes “Kim Kardashian: Hollywood” zooming up the app
charts.

Niccolo de Masi, CEO of Glu Mobile, which makes the Kardashian game, told CNBC its new hit title could remain popular -- and profitable -- “for years, not months” to come.
Really? The company takes a more guarded tone in its latest quarterly filing, acknowledging: “Our success depends, in part, on unpredictable and volatile factors beyond our control, including
consumer preferences, competing games, new mobile platforms and the availability of other entertainment activities.”

And what about Rovio Entertainment, the Swedish company behind the
Angry Birds franchise that has spread far beyond the mobile game to plush toys, candy, TV and movies? It reported a slowdown in growth last year after doubling revenue in 2012. The buzz around a
potential Rovio IPO has disappeared, and rightly so, given the fortunes of its publicly traded rivals.

For casual games like "Candy Crush," staying at or near the top of the heap over time is
a especially challenging with new titles coming out all the time and the ease with which apps can be downloaded or deleted. King Digital, of course, has tried to extend the Midas touch to newer titles
like “Pet Rescue Saga,” and “Farm Heroes,” but they didn’t pick up the slack enough in the second quarter.

“Newer [intellectual property] in the form
of 'Farm Heroes' and 'Pet Rescue' has been less successful than we anticipated at this stage and it is possible that King games are peaking earlier and could have a shorter lifespan
going forward,” wrote JPMorgan analyst Doug Anmuth in a research note issued today. That suggests King would have to create hit games at a faster clip to make up for shorter lifespans.

Given the extreme risk involved, it’s a wonder why the mobile game companies want to go public in the first place, except for the short-term opportunism of insiders and underwriters. The
games might be casual, but the scrutiny from Wall Street is anything but -- leading to a roller coaster ride that may have more downs than ups. King this morning has already seen its stock price fall
23% to under $14 a share. Now it needs a new hit more than ever.